Russia faces economic slowdown amid rising fiscal pressures
By late autumn, the Russian economy began to show clear signs of weakness. Industrial decline has intensified, the federal budget is caught between a widening deficit and pressure to reduce spending, and inflation remains unstable. Price growth slowed in early November, but even the Bank of Russia does not view this moderation as durable.
The deficit may increase by the end of the year
Federal budget revenues and expenditures for September–October 2025 remained stable, shifting the key uncertainty over levels of government spending to year-end. Revenue is likely to be close to the budgeted level: this requires inflows to be roughly 5 per cent lower than in the final two months of 2024.
Year-end expenditure remains the main unknown and will determine the size of the deficit. To meet its commitment to the Bank of Russia and prevent spending and the deficit from exceeding the legal limits, the Ministry of Finance would need to reduce expenditure in November–December by about 18 per cent compared with the same period in 2024. If spending at the end of the year matches last year’s level, the deficit will exceed the statutory target by around RUB 2 trillion and approach 3.5 per cent of GDP.
From August to October, federal spending was 10 per cent lower than in the previous three months, from May to July. The optimistic interpretation is that the Ministry of Finance has managed to distribute expenditure more evenly throughout the year and will avoid a December surge. The pessimistic one is that the ministry’s implementation of the spending planned for 2025 is falling behind schedule, and the need to finance the amounts ‘saved’ earlier in the year will increase December spending by roughly RUB 1 trillion, pushing the deficit towards 4 per cent of GDP.
The interest rate continues to fall
The 50-basis-point cut approved by the Bank of Russia’s Board of Directors on 24 October elicited little reaction from either businesses or the government. The main arguments in favour of the reduction were the government’s promise to narrow the budget deficit next year, and the assumption that the recent rise in inflation expectations reflected one-off factors – the forthcoming VAT increase and faster growth in petrol prices in August-September.
These arguments are unconvincing. Inflationary pressure is easing only gradually, inflation expectations remain elevated, and consumer demand continues to expand, driven by rising wages amid labour shortages. Slowing economic growth is widening the imbalance between supply and demand, adding further upside risks to inflation.
The rate cut was accompanied by neutral communication from the Bank of Russia, indicating that there is no commitment to additional monetary easing. In its forecast, the Bank of Russia left room for another reduction at the final Board meeting of the year on 19 December, while raising its projected interest rate level for 2026.
The Bank of Russia is undoubtedly in a difficult position. In its assessment of banks’ balance-sheet dynamics, it rightly notes that saving activity – primarily among households – remains stable. However, it omits the fact that this activity has fallen sharply since the beginning of 2025, and that more than half of the increase recorded this year reflects interest accrued on existing deposits rather than new inflows.
Figure 1 shows that the rapid expansion of deposits in the second half of 2024 drove the accelerated growth of banking system assets – the so-called ‘credit expansion’ that kept inflation elevated. By contrast, the slowdown in deposit growth in early 2025 reduced the aggregate value of banking assets, making it an essential disinflationary factor alongside the rouble's appreciation.
Data for August–September indicates a certain recovery in banks’ lending activity. Analysts at the Bank of Russia note a modest revival of credit demand from the corporate sector following the first steps towards lowering interest rates. However, the scale of this recovery remains too limited to have any meaningful effect on inflation dynamics at this stage.
Isolation is constraining import growth
After a brief depreciation of the rouble in early September, which triggered expectations of further weakening, the situation stabilised quickly, and the Russian currency regained its lost ground. Notably, even net foreign-currency purchases by households amounting to USD 2 billion in October did not lead to any significant weakening of the rouble.
There is no consensus among experts on the reasons for the rouble’s appreciation. The influence of several factors – the higher interest rate, the increased attractiveness of rouble deposits, and the inflow of foreign currency through carry-trade operations by non-residents and resident exporters – is not in doubt. Yet the question of why the economy has not responded to the rouble’s strengthening earlier this year remains open.
Economic theory declares that an appreciating currency reduces export competitiveness and increases the competitiveness of imported goods, leading to lower exports and higher imports. Empirical evidence supports this view. For example, Figure 2 shows the relationship between the Brazilian real and Brazilian imports in 2000–2025. The chart shows that the national currency’s appreciation was quickly followed by import growth in 2002–2007 and 2009–2011, whereas its depreciation in 2011–2015 led to a decline in imports.
Despite significant fluctuations in the rouble’s exchange rate, the Russian economy has, somewhat unexpectedly, maintained stable monthly import volumes of around $20 to $25 billion, which corresponds to the pre-war level (Figure 3). The most likely explanation is that import growth is constrained by logistical and payment difficulties, as well as by a shrinking pool of partners willing to trade with Russia amid heightened uncertainty.
Systemic weakening of the industrial sector
Russia’s industrial sector is showing an increasingly pronounced downward trend. According to Rosstat, industrial output grew by 0.7 per cent in January–September 2025 compared with the same period of the previous year. Yet this headline figure masks a sharp decline across the main industrial segments. Of the 29 subsectors listed in Rosstat’s summary, 16 recorded year-on-year contraction three and six months after the beginning of 2025; after nine months, the number had risen to 21. Growth was observed only in four ‘military’ subsectors, three ‘civilian’ ones (metal ores, tobacco products, and textiles), and in the repair and installation of machinery and equipment – an intermediate segment dependent on the utilisation of military repair capacity.
After three quarters, 22 out of 29 subsectors showed slower growth (or deeper contraction) than after the first half of the year. Of the 129 industrial products for which official statistics are available, 106 recorded lower output in the first nine months of 2025 than in the same period in 2024 (90 after the first quarter, 96 after the first half).
Against this backdrop, agriculture appears to be a rare ‘safe haven’. Despite earlier concerns about drought in southern regions, grain yields in 2025 have been significantly higher than last year. In industrial crops, the negative picture is confined mainly to sunflowers: the harvested crop is currently 13 per cent below last year’s level.
By contrast, the situation in livestock and poultry farming is less favourable. The cattle herd has declined by 3.4 per cent, including more than 5 per cent in household farms. Poultry numbers have fallen by 0.7 per cent. As a result, meat and poultry output and milk production have increased by only 0.3 per cent, which may accelerate price growth for meat and dairy products in the coming months.
The construction sector continues to grow, but only according to Rosstat, which reports a 3.1 per cent year-on-year increase for the first nine months of 2025. These figures contradict data showing declines in the production of ready-mixed concrete (down 5.5 per cent), building blocks (down 13 per cent), bricks (down 10 per cent), and ceramic tiles (down 15–25 per cent). The statistics on new residential floor space commissioned – down 5.6 per cent over the same period – appear closer to reality.
What the 2026 draft budget conceals
At the end of September, the Government submitted the draft federal budget for 2026 to the State Duma. The scope for analysing this document is limited: in Russia, not only war-related expenditure but most budget expenditure data – apart from the aggregate total – is classified. As a result, the analysis of the 2026 budget must rely on a ‘plan-to-plan’ comparison, recognising that the actual figures for the 2025 budget may diverge from the plan in either direction.
Macroeconomic developments this year have differed from the Ministry of Finance’s assumptions when preparing the 2025 budget: economic growth has been weaker than forecast, and inflation has been higher. Contrary to expectations, the rouble has appreciated by 40 per cent, sharply reducing the value of oil and gas revenues. At the same time, the Bank of Russia’s high interest rate has increased budgetary spending on subsidised loans and domestic borrowing.
The economic outlook for next year is even more concerning. Expected GDP growth is only 1.3 per cent, inflation remains within the ‘desired’ 4 per cent range, and the trajectory of global oil prices offers little reason for optimism. The authorities are reluctant to forecast a significant rouble depreciation, as this could raise inflation expectations and turn these risks into reality. As a result, projected budget revenues remain at roughly the current level, with only the increase in VAT from 20 per cent to 22 per cent providing additional income for the federal budget.
Even this modest increase in budget resources – 0.7 per cent of GDP – is not directed by the Ministry of Finance towards higher nominal spending, but towards reducing the budget deficit, which is projected at 2.6 per cent of GDP this year. In economic policy, this approach is known as fiscal consolidation; as carried out in Russia, it results in higher tax pressure and a decline in budget-funded demand in real terms.
The Ministry of Finance argues that expenditure growth is outpacing the economy’s capacity, and therefore sees limiting it as essential to preventing crisis scenarios similar to 1998. Yet the ministry has virtually no allies within the government willing to defend macroeconomic stability: each minister and other primary budget recipient seeks to expand their ‘share of the pie’. Contesting these demands is difficult: behind each request stand presidential decrees, directives, state programmes, and national projects. Conceding to one would mean conceding to all.
The ministry’s only option is to persuade President Vladimir Putin of the need for fiscal consolidation: nominal expenditure should grow only minimally, and decisions on reallocating funds should be taken by him personally.
Even if total spending next year increases only marginally, the budget still contains obligations that cannot be revised: higher debt-servicing costs, mandatory indexation of pensions and public-sector wages, and increased subsidies for preferential mortgages and other subsidised loans. By introducing an element of ingenuity, the Ministry of Finance has identified an area where substantial cuts appear possible: the main reduction falls on the Ministry of Defence, which, according to the author’s estimate, will receive roughly RUB 1 trillion less than its expected expenditure this year.
The nominal reduction in planned expenditure for the Ministry of Defence does not imply an actual decrease. Finance Minister Anton Siluanov has already stated that defence spending will not fall next year compared with the current level. Once the budget is approved, the Government may reallocate funds between expenditure lines without informing parliament. Likewise, nothing prevents the Ministry of Finance from announcing in the middle of next year that revenues are insufficient to meet budget commitments and that the deficit must be increased. This approach allows the ministry to avoid negotiations with ministers over additional resources, while giving the president the option to raise defence spending to whatever level he considers necessary.
It is also technically possible to borrow several additional trillion roubles from banks in the final days of December 2025 and then use these funds to finance next year’s military expenditure, formally recording the spending under the current fiscal year.